Over at The Incidental Economist, Adrianna McIntyre explains part of the health care law that many people probably did not know was in it. (I know I didn’t — at least not in detail.) Even if the individual mandate is delayed for a year, she points out, the private insurance market won’t immediately be destroyed by the so-called “adverse selection death spiral” — the crash that occurs when health plans contain too many sick people (net-users of the money in the pool) and not enough net-payers (healthy people).
The short version? Obamacare contains a partial bailout for insurers with losses greater than 3 percent in any of the first three years:
[T]here are deep-in-the-weeds protections baked into the Affordable Care Act: risk adjustment, reinsurance, and risk corridors…
…[R]isk corridors will play the biggest role if the individual mandate does get delayed. Their entire purpose is to stabilize premiums during the first three years of Obamacare, when it’s especially difficult for insurers to price plans.
Here’s how it works: exchange plans (QHPs) projected how much their risk pool would cost overall in 2014, their “target” cost. If they’ve significantly miscalculated—or, say, if a mandate delay causes adverse selection that they couldn’t have predicted—HHS will take action…
As McIntyre describes in more detail, the “action” involves a 50 percent bailout for costs that exceed 103% of the insurers’ cost target, and an 80% bailout for costs that exceed 108% of target. If a plan undershoots its cost target, it has to pay HHS according to a similar formula for costs below 97 percent and 92 percent. Section 1342 of the ACA states that the “target” amount is the total of all premiums paid minus administrative costs — that is, it’s the break-even point for the plan.
Ideally, the plans that undershoot costs are supposed to pay for the ones that overshoot. But there is no such limit contained within the law, so if an industry-wide problem develops, it has not been been budgeted for. As McIntyre puts it:
Importantly, it doesn’t need to be budget neutral; if the math demands it, the government can pay out more than it collects through the program. This could be expensive—the CBO scored the health law as though risk corridors were budget neutral—but it could also be offset by foregone subsidies.
This helps explain why Obamacare is attractive enough for insurers to take the risk. They won’t recoup everything if it goes badly, but even if a plan’s costs are twice as great as the premiums collected, its losses are limited by this provision alone to 23.9 percent of premiums collected through 2016. (There are further provisions designed to mitigate losses by having plans with lower costs share the risk with plans that have higher costs, but none of that depends on the taxpayer.)
What if the mandate is not delayed, but the current enrollment “glitches” cause an adverse selection problem anyway (i.e., the most desperate uninsured are more likely to have the persistence to enroll and enrollment of healthy people just never catches up)? An industry-wide bailout might be needed anyway.
Either way, next fall, if higher premiums are announced for exchange plans in 2015 and it becomes clear around the same time that a bailout of insurers is on its way, it isn’t going to go over well with the public.